After a year characterized by policy uncertainty and weak performance, healthcare stocks are poised for a rebound in 2025, according to a report from Citi analysts. The firm points to more favorable valuations and a potential turnaround in the sector’s underlying fundamentals as key drivers for this anticipated shift.
In a note released on Monday, Citi analysts highlighted the recent “relative underperformance” of the healthcare sector, which has seen only a modest 1.1% gain this year. In contrast, the broader S&P 500 index has surged by 26.2%. However, the analysts suggest that this lagging performance may have helped correct valuations, providing an attractive entry point for investors.
“What a difference a year makes. This past year’s relative underperformance and flattish absolute return has gradually alleviated our valuation concerns,” the analysts wrote, expressing a more optimistic outlook for the coming year.
Despite the sector’s struggles, Citi believes healthcare stocks are approaching a pivotal moment, with fundamentals showing signs of improvement. The analysts predict a strong earnings growth of 19% for the sector in 2025, a significant leap from the expected 4% growth this year.
The analysts’ optimistic forecast follows a challenging 2024 for the healthcare industry, marked by ongoing policy uncertainty, particularly regarding President-elect Donald Trump’s controversial appointment of Robert F. Kennedy Jr. to head the Department of Health and Human Services. Kennedy, a vocal critic of vaccines, has stirred concerns in the healthcare sector, leading to significant declines in vaccine makers such as Moderna, Pfizer, and Novavax in the wake of his nomination last month.
However, some market observers argue that the negative market reaction may be overstated. BMO analysts, for instance, have suggested that concerns about Kennedy’s influence are overblown, particularly for companies like Eli Lilly and Novo Nordisk, which produce popular weight-loss drugs such as Wegovy, Ozempic, and Zepbound.
BMO analysts emphasized that Kennedy’s role would likely have limited impact on drug pricing and availability policies, suggesting minimal risk to the shares of these companies. Citi analysts appear to share this view, predicting a 64% return for Eli Lilly, which holds the largest weighting in the healthcare sector at 12%.
“Although policy controversy remains, we think this is largely priced in,” Citi analysts stated. They also forecast that pharmaceutical and biotechnology stocks are likely to lead the sector’s outperformance in 2025.
Citi’s outlook for healthcare comes as part of the firm’s broader shift toward select defensive stocks. The analysts noted that certain cyclical stocks are currently priced at high valuations, with limited near-term earnings growth expected. They expressed interest in certain defensive sectors that could offer more stable returns in the face of economic uncertainty.
As healthcare stocks prepare for a potential rebound in 2025, Citi’s analysis suggests that investors may find attractive opportunities in the sector, particularly within pharmaceutical and biotechnology companies.
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